Today’s Blog – Tuesday 15th November 2016

In the early 1990s President Clinton aide James Carville famously said:

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

We were reminded of this quote recently when pondering the limitations that capital markets (debt and equity) will place on the new energy policy aspirations that a Trump presidency will wish to push. We think these include:

Federal leases for offshore Arctic – and offshore East and West Coast – might be offered – but would anyone take them up when the industry has a minimal exploration budget and these areas are high risk in terms of cost, geology – and likely legal disputes from parties other than the Federal Government. (As noted last week, we think the key Arctic exception is the on-shore ANWR area in Alaska – given its fabulous potential – but even this would still face major legal issues).

Encouraging US coal to recapture electricity market share will not work if it remains economically better to burn gas in the US generator fleet. Interestingly, it could be “China” that comes to the rescue of the US coal industry – due to the current increase in coal prices caused by supply-side restrictions in Chinese coal production (which could however be reversed very readily).

Many capital market custodians are increasingly reluctant to fund – by debt or equity – investments/projects/companies/etc with long term carbon intensive signatures. This is their call – and it will not be affected by a short term change of Government.

If solar can make money at <US$30/MWh – as was apparently indicated by a winning bid in the UAE earlier this year (and apologies for repeating this ad nauseum – this “number” is one of the most important to have emerged across all energy markets this year) – then capital will flow to solar as a lower cost provider of (admittedly intermittent) power than pretty much any greenfields fossil fuel alternative.

Commodity prices

Crude prices were fairly flat overnight, with Brent down slightly to US$44.51 and WTI up slightly to US$43.46. Thumbs are twiddling before the OPEC meeting.

Henry Hub had a nice upwards move of ~5% to close at US$2.75. Current US gas production is falling year on year according to recent EIA reports.

LNG and international gas

A couple of recent stories from Russia’s Sakhalin Island to Japan’s north:

Gazprom and Rosneft are in a current legal battle over granting access to the latter into the former’s existing gas pipeline infrastructure on Sakhalin. The dispute has now gone to an appeal of a decision by Russia’s Supreme Court. The concept of “Russia Inc” acting collectively is presumably subordinate to the jostling for power in Putin’s court – and the strategy of autocrats everywhere of dividing and conquering.

Japan is said to be looking at pipelining gas from Sakhalin to Hokkaido. This would be a technically challenging and expensive project – but likely not as politically difficult as some other pipeline projects around the world (e.g. take with a pinch of salt any concept that involves going through e.g. North Korea, Afghanistan, Pakistan-to-India, etc).

Company news – AGL

As we noted a number of times in the first half of this year, the concept of importing LNG into East Coast Australia was becoming an increasingly viable one, notwithstanding it being apparently bizarre to do so into an LNG exporting nation.

This concept has received support from AGL advising the market yesterday that it had committed A$17M to feasibility/FEED studies into the idea.

This expenditure arguably buys AGL a cap on its domestic gas supply alternatives and as such is a cheap hedge. And the concept might work as well.

Given the different capital market appetites for downstream vs upstream companies at present, the former are in a powerful position to make strategic moves whilst the latter are wounded and focused on tactical issues such as cost-cutting.

Interestingly, we did a quick mental count this morning and came with at least 4 nations that both import and export LNG: the USA, the UAE, Indonesia and Russia.,

Company news – Woodside Petroleum (WPL)

WPL has announced the appointment of a new non-executive Director, ex Federal Resources Minister, Ian MacFarlane. He is a reasonably widely respected figure and could be set up to become WPL’s next Chairman.

Quote of the day

Continuing the theme of capital market prejudices being at least as powerful as political policies, we quote the following from John Maynard Keynes:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”